📘 Decoding GST Refund on Inverted Duty Structure: A Tale of Rule 89(5) vs. Section 54(3)

📜 The Legal Framework: What the Law Says

🔹 Section 54(3) of CGST Act, 2017

This section governs refund of unutilized input tax credit (ITC).It allows refund where the rate of tax on inputs is higher than the rate of tax on output supplies—called inverted duty structure.

Key wording:

"A registered person may claim refund of any unutilised input tax credit..."

✅ It does not distinguish between input goods and input services.

🔸 Rule 89(5) of CGST Rules, 2017

This Rule lays down the formula to calculate the maximum refund amount under inverted duty.

Amended in April 2018, it states:

“Net ITC means input tax credit availed on inputs during the relevant period other than input services and capital goods.”

🚫 Input services are explicitly excluded.

⚖️ The Legal Conflict: Rule vs. Section

Particulars	Section 54(3) (Act)	Rule 89(5) (Rule)
Governing Body	Legislature	Executive (via rulemaking)
Refund Eligibility	All ITC (Goods + Services)	Only ITC on input goods
Type of Provision	Substantive	Procedural/Delegated
Conflict	None in 2017	Arises post-April 2018

🛑 Rule 89(5) is seen as diluting a statutory right conferred by the Act.

🧑‍⚖️ Key Judicial Pronouncements

1. 🟩 VKC Footsteps India Pvt. Ltd. v. Union of India (Gujarat High Court – 2020)

Held:

• Rule 89(5) is ultra vires the CGST Act.

• Section 54(3) permits refund of all ITC, including services.

• Rules cannot override the parent Act.

✅ Favourable to Assessee

2. 🟥 Transtonnelstroy Afcons Joint Venture v. Union of India (Madras High Court – 2020)

Held:

• Rule 89(5) is valid and consistent with Section 54(3).

• Refund is a policy decision, not a right to all credits.

• Government can decide what to refund and what not.

🚫 Unfavourable to Assessee

3. ⚖️ Supreme Court – Union of India v. VKC Footsteps (2021)

Held:

• Rule 89(5 is valid); courts cannot rewrite fiscal policy.

• The exclusion of input services is not arbitrary but a policy choice.

• However, the GST Council should revisit the formula due to genuine hardship faced by taxpayers.

🔄 Balanced: Rule upheld but with directions to policymakers

4. 🟢 Kandla Port Trust v. Commissioner of CGST (CESTAT Ahmedabad – 2024)

Held:

• Despite the SC ruling, in factual situations where refund denial defeats GST neutrality, tribunals may intervene.

• Refund of input services granted under broader interpretation of Section 54(3).

• Reinforces that substance over form should prevail.

✅ Recent win for the taxpayer in port/infrastructure sector

🧠 Key Learnings for Taxpayers

1. 📌 Know Your Rights: Section 54(3) gives a statutory right to seek refund. Challenge unjustified denials.

2. 📌 Rule vs. Act: In conflicts, the Act prevails—but courts now favor balanced interpretation, not automatic invalidation.

3. 📌 Industries Most Affected:

   • Ports & logistics

   • EPC & infrastructure

   • Service-intensive exporters

   • Pharma & chemicals (input-heavy, zero-rated output)

4. 📌 Advisory:

   • Keep refund documentation ready.

   • Where denial is based on services, assess litigation viability.

   • Monitor GST Council updates for future amendments.